How Will the Market Balance Record Corn Production and Use?

The May 11, 2010, World Agricultural Supply and Demand Estimates (WASDE) report confirmed the current grain market expectation for a record corn production, near-record soybean production and a more than a sufficient wheat crop. The combination of comfortable carryover stocks, the expectation for large crop production and price-sensitive buyers will result in limited price movement from current levels unless there is an unexpected shock to change expectations.

The May WASDE report provides updated estimates for the 2009-2010 marketing year (old crop in storage) and the first projections for the 2010-2011 marketing year (crop currently being planted). There were relatively minor adjustments made to the 2009-2010 corn estimates when compared with the April report. However, the projections for the 2010-2011 marketing year provide insights into several of the key fundamental variables that will influence both new and old crop prices.

Typically, historical trend line yields are used as initial estimates for national average yield values. This yield estimate then is adjusted throughout the growing season using subjective estimates or field estimates later in the summer. The initial 2010-2011 estimated national average corn yield is 163.5 bu./acre, which is 2.7 bu. above the 10-year trend line yield of 160.8. This is 1.2 bu./acre less than the record average corn yields reported in 2009.

A 2.7-bu. adjustment may not seem like a significant change. However, when 2.7 bu. is multiplied by an estimated 82 million harvested acres of corn, the bushels begin to add up.

The higher yield estimate was used to adjust for the greater yield potential from early planting. This is a reasonable adjustment given the current good soil moisture conditions across the core U.S. growing regions, improving corn genetics and rapid planting progress. However, we are just beginning the growing season and a lot of things can happen before the 2010 crop is harvested. As always, growing season weather will be a critical variable that influences crop prices.

The combination of increased 2010 corn plantings and near-record yields per acre would result in a 13.37 billion bushel corn crop, which would surpass last year's record corn production of 13.11 billion bushels. Add the expected old crop carryover of 1.74 billion bushels, plus a small amount of corn imports and there is an estimated 15.12 billion bushels of corn available for use in the 2010-11 marketing year.

The question becomes how these bushels will be used and how much is expected to be in inventory at the end of the marketing year.

The three major uses of corn are animal feed, industrial use and exports. Feed use is expected to drop slightly from 5.38 billion bushels in 2009-2010 to 5.35 billion bushels in 2010-2011. In general, livestock numbers and meat production are expected to increase in 2010, with the exception being a 2.2% reduction in beef production. Part of the reduction in feed use can be explained by an expected increase in corn used for ethanol production and the resulting larger supplies of dried distillers grains. Dried distillers’ grains can be used as a partial substitute for whole corn in many livestock rations.

The WASDE report forecasts an increase in food, seed and industrial use from 5.73 billion bushels for the 2009-2010 crop to 5.95 billion bushels in the 2010-2011 crop. Food and seed use of corn is relatively small and stable when compared with industrial use. Industrial use can be subdivided into ethanol, which is the largest segment; high-fructose corn syrup; starch; cereal; and beverages. The non-ethanol industrial use also is relatively small and stable. The ethanol portion of industrial use has been the hot topic in the corn market for the past several years.

Approximately 4.6 billion bushels of corn are projected to be used within the ethanol industry during the 2010-2011 marketing year. This is roughly 35% of total corn use, so just more than 1 in 3 bu. of corn will be sold to an ethanol plant. For comparison, approximately 4.4 billion bushels of corn are expected to be used for ethanol production during the 2009-2010 marketing year.

There were two key federal policy assumptions made to arrive at the 4.6 billion bushel estimate for ethanol use. The first assumption was that the federal ethanol blender's tax credit – which is scheduled to expire on Dec. 31, 2010 – will be renewed or extended. The current market expectation is that the blender's credit will be renewed. However, a similar credit for biodiesel production was allowed to expire and has severely reduced the profitability of the biodiesel industry. If the blender's credit is not renewed or extended, the ethanol industry could face another round of financial hardship and restructuring.

The second assumption is that the current 10% maximum ethanol blend rate for gasoline will not restrict ethanol use. The current Environmental Protection Agency (EPA) regulations have placed a maximum of 10% ethanol blend for gasoline. The ethanol industry is growing at a rate where total industry production soon will exceed 10% of the gasoline used within the U.S., which is sometimes referred to as the blending wall. Once this point is reached, additional ethanol either will need to be exported or used by flex-fuel vehicles that can use E85.

There is a proposal under review by the EPA to increase the maximum blend rate to 12% or 15% percent. The current market expectation is that the blend rate will be increased and the growth in ethanol use will continue. However, this policy debate will need to be followed closely.

The export market is the final major use of corn. Corn exports for the 2010-2011 marketing year are forecast at 2 billion bushels, which is slightly larger than the 2009-2010 estimate of 1.95 billion bushels. While export use is not as large as feed or ethanol use, exports tend to be more variable and harder to predict. As a result, export levels can have a significant influence on market prices.

A recent example is the strength seen in corn prices after the announcement of relatively small corn sales to China. China has been a major market for U.S. soybeans for several years but is typically either self-sufficient or a net exporter of corn. Many cash and futures market traders are debating whether the small Chinese purchases of U.S. corn is a signal that it will have a significant shortfall in domestic production and needs larger purchases in the near future or China is just using a strategy to fill a temporary gap in the domestic supply chain. If China returns to the international corn market and makes large purchases, U.S. corn prices should respond with a noticeable rally.

Given the forecasts for record corn production and record total use, the 2010-2011 ending stocks are projected to be 1.82 billion bushels. While this is considered large by historical standards, it is not large when viewed as a percentage of total use. The projected stocks-to-use ratio for the 2010-2011 marketing year is 13.7%, which is below the 15-year average of 14.4%. This is considered a comfortable ending stocks level, but not excessive.

Tracking the dynamics of the corn market is challenging because of the diversity of uses for corn. Spending a few minutes each day to follow market information can pay big dividends in your farm's net income.